Despite being a penny stock, as in its share price is valued at just above one penny, LiveWire Ergogenics $LVVV is a company that is taking a unique path with operating a cannabis company and it looks set to work. LiveWire purchased the Estrella Ranch and has turned that into a 148K sq. ft. open organic grow facility. The thinking is that there is a market for organic, “hand-crafted” cannabis that can be distributed anywhere in California providing a continuous revenue stream of dedicated consumers. LiveWire’s business model had them purchase their real estate so this locks them into a Californian micro-climate highly prized for growing intricate agriculture such as wine vineyards.
I believe this approach would hit a sweet spot for cannabis. The question I have, and I would assume another investor: will this work?
Here is a look at the current chart:
LiveWire is reporting earnings already and is expected to be profitable soon according to guidance. However, they do not report quarterly just yet, or at least here on Seeking Alpha, you cannot find that information. But, after many turbulent moments in its existence, LiveWire is gearing up for a more consistent future.
Normally, I lay out a lot of charts and dig through a lot of historical data. That won’t happen with this analysis simply because of the lack of historic data that an investor could put together. Instead, I’m digging into the neighborhood and seeing what growing cannabis in Paso Robles, CA could do, what the amount of cannabis could be produced, and how that factors into an investment. Let’s break down what they are doing and how it might fit into the Californian cannabis market.
Cannabis in California
For many, many years, I lived in California and although I am not currently standing in the state I call it home. I have lived in both Los Angeles and San Francisco so feel equally comfortable with both Northern California’s way of life as Southern California.
The Estrella Ranch is in the Paso Robles area of California, somewhere close to the midway point between both Los Angeles and San Francisco. This is a coastal community and is home to wine country. I mention that because as it turns out wineries are ripping out vines in exchange for cannabis plants at an alarming pace. I have read many articles on this and kind of chuckle over it.
This region is known for its micro-climate that produces very good wine, albeit not of the same caliber as Napa Valley, but that may be more about marketing than potential.
Cannabis is booming in California and I expect that to continue. This will go a long way towards LiveWire’s goals of achieving sales revenues and profits. Also, California’s real estate is rarely heading lower in price so the fact that LiveWire purchased their property will only benefit them in the long run.
I wanted to look at potential scenarios as to how LiveWire’s operations could play out. First, there is the grow acreage that they have that comes in around 148K sq. feet. It is scalable, meaning they do not have to grow everything all at once but can continually expand into their acreage. What could that mean in terms of revenues and profits? The micro-climate goes a long way to providing a quality product that adherents may take strongly to and LiveWire may be able to build up a large, devout following.
Next, we have the idea of owning the real estate on which the company grows its products. Most of the companies I have analyzed are leasing their property, although there are some that are not. Paso Robles real estate is in an area of California that usually moves higher in value over the long run, financial crisis, and housing market crash notwithstanding. But, by owning the land LiveWire has the ability to maintain control of the company’s future over the long run. The only downside to that is the upfront costs and capital maintenance required. In the long run, this will likely pay off if LiveWire can survive through to full operations and profitability.
I did an analysis here on Seeking Alpha about California that was well received. In it, I showed how California’s demographics would push cannabis sales upward to some $15B. As it is, currently in all of the United States cannabis sales are $15B. So, in just a few years’ time, California will eventually dwarf where the whole country is right now. My expectation for the United States is that overall cannabis sales will likely go over $100B in total sales. Then there is the overseas market which is starting to add to the revenues of US & Canadian companies.
Here is a look at the current tax take by the California Department of Revenue to show you how the state’s cannabis sales are heading higher:
(Source: California Dept. of Revenue – Author’s Chart)
Now that cannabis is legal on a recreational level, cannabis sales are expected to increase significantly over the next few years. At its current $4B levels, my calculations of $15B push this up nearly 300% in just a few years.
Organic products sort of hit a sweet spot for me and LiveWire’s products are just that. Californians tend to not only produce but consume agricultural organic products at a higher rate than the rest of the nation. Organic products have a growth rate of some 14% for agriculture; I have not found any measurable data separating organic cannabis sales from non-organic. But, my hunch is that since Californians eat organic food at a higher rate they will also likely consume organic cannabis at a higher rate.
Then there is the price point of organic product that appeals to me. First off, in 2018 when Canada legalized cannabis, big companies were created to produce massive quantities of cannabis at the lowest price possible. That approach did not work for many reasons and if you’ve been involved with investing in cannabis since 2018, you know what the charts look like for cannabis companies since that point.
Here is a look at the MJ Alternative Harvest ETF to put it into perspective for you:
(Chart Source: Trading View)
As you can see, the market was pushed up in 2018 only to take a long downturn throughout 2019 and into 2020. It is only recently that there has been a solid turn-around. This downturn was largely due to the fact that a lot of companies were not performing to investor expectations.
What is happening now is that cannabis companies are switching gears towards more premium products. Organic cannabis would be the ultimate in premium product commanding the highest price points and largest margins.
Given that, you can see why I think LiveWire’s approach of doing organic cannabis is what I would reference as my “Sweet Spot”; the ultimate in premium with the highest margins.
Cannabis is measured by yield and cannabis growers live and die by yield. Because LiveWire will be an outdoor grow facility they need not worry about yield per watt, the measure of how much electricity it takes to develop the crops. Instead, the metric they will be focused upon is yield per square foot and the average is ~40 grams per square foot.
Given that, with 148K square feet, that is a yield of 5,920 kilograms. The average price per gram on a wholesale basis was $3.31 across the nation. This would mean revenues of $19.595 million. As it turns out, the company projects ~$20M in revenues in just three years’ time, so I feel like their projections are reasonable. But, I also feel as if this number is low.
The high of the yield statistic is roughly 60 grams per, and honestly, I think that LiveWire could theoretically hit higher numbers on their yield for two reasons: first, they are in a micro-climate that is optimal for growing cannabis, and second, their approach and science leads me to believe that they will push higher numbers. If their yield hits the higher end, say 50 grams per square foot they could hit revenues of some 25% higher hitting ~$25M annual revenues.
This is the number that LiveWire is also projecting for four years out.
The average net return of the S&P 500 is 14%. Off of $25M that is a net income of $3.5M. There are $1.19B shares outstanding. That factors out to $0.0029 EPS. At a 30x multiple, this puts the stock price at ~$0.09 per share. Off of the current stock price of $0.0189, that is a 300% return in just a couple of short years.
But, this discounts some important factors: The real estate, the pandemic, and whether or not LiveWire Ergogenics will survive.
What do Los Angelenos do when they get fed up with Los Angeles? They sell everything and take their money up north to pursue their dreams of owning a winery in California’s breezy coastal areas. And, when that does not work, they rip up their vines in pursuit of a new dream: that of being a cannabis grower, something that is happening all up the Western Coast of the United States.
Historic real estate prices in Paso Robles, CA say that if nothing else, LiveWire could just wait out a storm and eventually sell its property for a profit, as this chart suggests from the St. Louis Fed:
(Data Source: St. Louis Federal Reserve)
Being someone that has shunned the high cost of real estate in California, I can see this as an opportunity for LiveWire to minimize downside risk. Real estate values continue to rise and if LiveWire can sustain itself and turn a dime on its venture, as they guide investors, then this alone is an opportunity to minimize the risk and eventually become profitable.
Cash on hand is the one variable that I am concerned about. Given public information, LiveWire has approximately $0.1M cash on hand but is burning through $0.6M per quarter, according to the data available through the internet.
Oftentimes, this information is distorted and we are ill-informed. I suspect that given the current state of the CEO’s mood, that the company is ready to gear up for much larger operations, there is a disconnect between the information we have and what is actually true. I am anxious to find out what the cash position is and how long LiveWire has with its potential operations and cash on hand.
In the meantime, LiveWire has achieved its operation status and is gearing up to scale operations and hit its revenue and earnings goals. I believe that what management has guided for future revenues is reasonable, if not slightly on the modest side.
Given that LiveWire is also operating with a premium product level they may very well hit their margin goals. If that occurs, then there is potential for significant capital appreciation. Again, however, I am not fully certain on the cash position but I also reiterate that given management’s recent communication to investors there is likely an avenue that allows for them to sustain themselves over the coming quarters until they achieve their revenue projections.
If LiveWire were to gear up for this year’s growing season with its license in hand and achieve revenue goals, this company could produce some interesting results that will add to a portfolio.
I have been focusing on the smaller companies within the cannabis industry. I see far more upside potential with these companies. This would be one of them. Despite this company’s status as an actual penny stock, I am heavily bullish on LiveWire Ergogenics.
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